Low carbon energy transition could save the global economy trillions

Two recent reports released by the Climate Policy Initiative (CPI) demonstrate that, with the right policies, a low carbon energy system consistent with avoiding the most damaging effects of climate change could free up trillions of dollars over the next 20 years to invest in better economic growth.

The first report, “Moving to a Low Carbon Economy: The Financial Impact of the Low Carbon Transition,” compares the costs of low-carbon electricity and low carbon transportation systems with current systems. The second, “Moving to a Low Carbon Economy: The Impact of Different Policy Pathways on Fossil Fuel Asset Values,” focuses on the risk of losses in the financial value of existing fossil fuel assets. A loss in assets’ value is critical as it constrains governments and businesses’ ability to borrow against them to finance growth and investment, including investment in a low carbon transition. The reports were commissioned by the New Climate Economy project as part of the research conducted for the Global Commission on the Economy and Climate.

Report highlights

Governments, rather than private investors and corporations, face the majority of stranding risk:

Governments own 50 – 70% of global oil, gas, and coal resources, as well as collect taxes and royalties on the portion they do not own. This risk is concentrated in resource-owning and producing countries, particularly major oil producers. However, governments also control much of the policy that could lead either to asset stranding or financial savings.

The right policies can maximise the financial benefits of a low carbon transition:

Transitioning to a low carbon electricity system would bring the global economy an estimated US$ 1.8 trillion in financial savings between 2015 and 2035. This is because significantly reduced operational costs associated with extracting and transporting coal and gas outweighs increased financing costs for renewable energy and losses in the value of existing fossil fuel assets.

Transitioning from oil to low carbon transport could increase global investment capacity by trillions or result in net costs, depending on policy choices. Regions that import more oil than they produce — including the United States, Europe, China, and India — stand to benefit most from together reducing their oil consumption in favor of low carbon alternatives regardless of whether oil-producing countries choose to act. However, if oil-importing countries act then oil producers can significantly reduce the impact on their economies by shifting to low carbon alternatives.

Coal offers the largest emissions reductions for the least loss in financial value:

Transitioning away from coal can achieve 80% of the needed emissions reductions for just 12% of the asset value at risk.

Priorities for action

Transitioning away from coal is a cost-effective path to a low carbon economy. Policies in the US and Europe combatting air pollution have put these regions on a path that will limit the risk of future losses in coal plants’ value. To limit asset stranding, China and India need alternatives to building planned coal-fired power plants.

Reducing the cost of financing renewable energy plants can significantly lower the cost of transition across the world. In the US and Europe, expanding and improving financing vehicles that can efficiently channel low cost institutional investment into low carbon energy infrastructure can reduce the cost of low carbon power by 20%. In developing countries, long-term, low cost debt can reduce the cost of low-carbon power by 30%.

Innovation and demand-focused policies are the best combination to limit loss of asset value. For example, a combination of taxes and innovation provides the most promising policy approach to achieve net financial savings from the transition away from oil.

Gas can be a bridge fuel for some regions till 2030. This is particularly true for China and India but to limit loss in asset value, global usage of gas would need to decrease after this time.

“For policymakers around the world wondering whether the transition to a low carbon economy will help or hurt their countries’ ability to invest for growth, our analysis clearly demonstrates that, for many, the low carbon transition is a no-brainer. It not only reduces climate risks, its benefits are clear and significant,” said Tom Heller, Executive Director, Climate Policy Initiative.

“Our analysis reveals that with the right policy choices, over the next twenty years governments can achieve the emissions reductions necessary for a safer, more stable climate and free up trillions for investment in other parts of the economy,” added David Nelson, Senior Director, Climate Policy Initiative. “This is even before taking into account the environmental and health benefits of reducing emissions.”

Visit the website for more information, or to download the full reports.